Basics of Industrial Organization and Competition Policy

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1 Basics of Industrial Organization and Competition Policy

2 What is Industrial Organization? S-C-P Paradigm Alternative Thoughts and Theories Why competition is regarded as important in our economy

3 What is Industrial Organization? Applied Microeconomics The subject of research is real industries. It has developed in connection with Antitrust policies. - the study of firms and markets - the study of their interaction

4 Microeconomics The subject of microeconomics is to describe resource allocation mechanism. Basic Theories - Perfect Competition - Perfect Monopoly

5 Perfect Competition Assumptions - There are so many buyers and sellers. - Each buyer and seller takes the price as given. - All Firms produce a homogeneous output. - Buyers and sellers have all relevant information about the market. - Entry and exit is free.

6 P Monopoly Theory Pm MC Pc MR 0 Q D Qm Qc

7 S-C-P Paradigm Basic Condition Elasticity of Demand Market Growth Network Externality Economies of Scale Scarcity of input etc. Market Structure Concentration Product Differentiation Entry Barriers Market Conducts Public Policy Antitrust Policy Regulation Trade Barriers etc. Collusion with Rivals Strategies against rivals Advertising Activity Market Performance Prices and Profits Efficiency Innovation Equity in distribution

8 The Harvard School - base on the S-C-P Paradigm. Monopolistic market structure would cause monopolistic behavior, and result in bad performance. Market structure should be competitive.

9 Arguments on Antitrust Policy. Different thoughts from Harvard School - the Chicago School - the Neo-Austrian School - Contestable Market Theory - Transaction Cost Approach They have come under spotlight since the last half of 1970s,and effected on the actual Antitrust policy, especially in the 1980s.

10 The Chicago School - The Analysis bases on the methodology of positive economics. - Market in real economy is regarded as the process of natural selection Only efficient firms could survive. Any types of market structure, resulted in market competition, would be efficient.

11 The Chicago School - A monopolist is the most efficient firm. If he gained excess profit, potential competitors would entry into the market. Competition would lead to competitive level of price. - Government intervention, including Antitrust policies, would have adverse effects on the market performance.

12 The Neo-Austrian School - It argues laissez faire as well as the Chicago School. - However, the neo-austrian make a critical attack on the neo-classical price theory. That is why price theory, assumed perfect information, would mislead in the way to understand the important nature of market economy.

13 The Neo-Austrian School - F.A.v. Hayek regards market as the process of discovery. In order to achieve efficient resource allocation, we must use all knowledge in society, dispersed among individuals. Market economy could resolve this problem through competitive process. - I. Kirzner explains market process by use the concept of entrepreneurship.

14 Transaction Cost Approach - R.H.Coase explains the reason why firms exist in real economy. The marketplace in the economy involves transaction costs. So firms are organized to cut down transaction costs. Markets and firms are alternative mechanism to allocate resources.

15 Arguments on Antitrust Policy Does Laissez faire seemtoberational direction to maintain competitive market? - Competition is like natural vegetation? Or cultivated plant? What kinds of policies are necessary to promote competition in market?

16 Functions of Competition Allocating resources efficiently Promoting innovation Process of discovery - information carrying function

17 Goals of Competition Policy Securing economic freedom Achieving good economic performance prohibition of monopolization prohibition of cartels prohibition of unfair trade practices

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